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A new report from the Center on
Budget and Policy Priorities, Examining the New Portman-Cardin
Legislation, explores several problematic provisions of the pension bill
introduced April 11 by Representatives Rob Portman and Ben Cardin. The
reports author is Peter Orszag, a senior fellow at the Brookings
Institution with expertise in pension and tax issues.

The Portman-Cardin bill includes some positive
changes, such as expanding and making permanent the savers credit created
by the 2001 tax legislation and modifying rules in the Supplemental Security
Income program so a disabled worker is not forced to deplete modest pension
savings before reaching retirement age. Yet most of its costliest
parts are tax breaks primarily for high-income individuals, who would likely
save without them and who already tend to be much better prepared for
retirement than individuals with less income and wealth. The bill
would:

Exacerbate the already-dire fiscal outlook.
At a time when substantial budget deficits loom as far as the eye can see,
the bill would add more than $100 billion to the deficit over the next
decade. That cost would be on top of the $350 billion to $550 billion
in reconciliation tax cuts allowed by the recently adopted budget
resolution.

Key Elements of the
Bill

·Accelerates to 2003 the
scheduled increases in maximum 401(k) and IRA contributions contained in
the 2001 tax legislation.

·Makes the above increases
permanent.

·Raises the amount a
household can earn and still contribute to a Roth IRA or traditional
IRA.

·Raises to 75 the age at
which an individual who has not yet retired must begin withdrawing funds
from a 401(k) or traditional IRA.

Not significantly increase the amount that people save for
retirement. The bill is not well targeted to achieve its stated goal of
encouraging retirement saving. Higher-income households are much more likely
than poorer households to have retirement savings and to respond to new
pension-related tax benefits by shifting existing savings from taxable
accounts into tax-preferred accounts. Among poorer households, in contrast,
pension contributions are more likely to represent new saving. Because (as
outlined below) the bulk of the bill is aimed at higher-income households,
it primarily will encourage the shifting of existing savings rather than an
expansion of savings.

Lock in temporary, unproven pension changes in the 2001 tax
legislation. The bill would accelerate the implementation of, and then
make permanent,[1]
provisions of the 2001 tax legislation that allow larger 401(k) and IRA
contributions by high-income individuals, such as business owners and
executives. In 2001, supporters of these provisions claimed they would
encourage more small businesses to offer pension plans, which in turn would
expand pension coverage among rank-and-file workers. This approach lacked
solid empirical backing when the legislation was passed, and little
information has emerged since then to show that these provisions are
promoting retirement saving among middle and lower earners. In view of the
large deficits projected when the baby-boom generation retires, Congress
should wait for data on the effect of these provisions before rushing to
lock them into permanent law.

Create new tax subsidies for higher-income households.
The bill also includes tax subsidies for higher-income households beyond
those in the 2001 tax legislation. For example, it would increase from
$160,000 to $220,000 the amount a married couple can earn and still
contribute to a Roth IRA. Also, it would entirely eliminate income limits
for IRAs on workers who are not covered by an employer-provided pension plan
but whose spouse is covered by such a plan. Only the top 10 percent of
joint filers would benefit from these changes, according to data from the
Urban Institute-Brookings Institution Tax Policy Center.

Encourage the misuse of retirement accounts as tax
shelters. In another new tax subsidy for higher-income households, the
bill would weaken the minimum distribution rules intended to ensure that
tax-advantaged retirement accounts are used primarily to finance retirement
needs, rather than for other purposes such as estate planning by wealthy
individuals. Specifically, the bill would raise from 70½ to 75 the age at
which an individual who has not yet retired must begin withdrawing funds
from a 401(k). This would enable high-income individuals to make
tax-deductible deposits in these accounts that then could be used primarily
to build substantial estates, rather than for retirement purposes.

A preferable way to simplify the minimum
distribution rules would be to exempt up to $50,000 of pension and
retirement account assets. If this were done, the rules would no
longer apply to two-thirds or more of retirees.

Not represent sound economic policy even if it did
encourage saving. If the bill were successful in achieving
its ostensible goal of immediately raising retirement saving, it would be
counterproductive now from an economic perspective. To boost the
economy in the near term, additional spending, not additional saving, is the
appropriate policy goal.

As the Centers paper
concludes, the Portman-Cardin bills emphasis on expanding tax benefits for
high-income households is unfortunate. Pension reform should focus on
expanding tax incentives for lower- and moderate-income earners.
Contributions to tax-preferred retirement accounts by such workers are more
likely to represent new saving, rather than asset shifting, and are much
more likely to reduce the risk of living in poverty during retirement.
Moreover, given the troubled fiscal outlook facing the nation, the bills
costly and not-well-targeted tax breaks are not fiscally prudent.

End Note:

[1]
Under the 2001 legislation, these provisions would expire by the end of
2010.